Military troops have opened a large-scale assault against hundreds of anti-government protesters occupying a landmark square in Bahrain's capital.

At least two protesters and three policemen were reported to have been killed, and hundreds injured when riot police overran Pearl roundabout, the focal point for a two-month anti-government uprising.

Gunfire was heard throughout the capital and at least five helicopters were circling scenes of clashes, amid widespread panic on the streets below.

Riot police also entered Manama's Salmaniya medical centre for the first time since the demonstrations began and doctors reported they were being prevented from reaching the hospital and treating patients inside. The police were also preventing casualties from reaching the facility. By 8am, they had closed its main gate and stationed forces outside.

Wednesday morning's events are a significant escalation in more than eight weeks of clashes that have threatened the legitimacy of Bahrain's monarchy and stoked sectarian tensions throughout the Gulf and Saudi Arabia. They follow the arrival of more than 1,000 troops from the Gulf Co-operation Council, invited to the kingdom by its besieged rulers.

One armoured personnel carrier flying the flag of the United Arab Emirates was seen by bystanders this morning amid a column of troop carriers.

Tanks and armoured personnel carriers later moved towards Budaya Street in Manama, minutes before another protest rally was expected to start there, and demonstrators are braced for more pitched battles after the regime declared a state of emergency for the next three months.

After scattering demonstrators with a comprehensive show of force, Bahrain's government banned all public gatherings, imposed a curfew from 4pm–4am in some areas of Manama and sent its security forces to two of the city's hospitals.

The crackdown was roundly denounced across the Shia Islamic world. Iraq's firebrand cleric Moqtada al-Sadr called a rally in Basra to protest against the government attack.

Elsewhere, the leader of Lebanon's Hezbollah, Hassan Nasrallah, was due to speak later, while the Iranian president, Mahmoud Ahmadinejad, described the scenes as "unjustifiable".

"Today, we witness the degree of pressure imposed on the majority of people in Bahrain and [they] use rifles and cannon ... What has happened is bad, unjustifiable and irreparable," Ahmadinejad said.

The chaotic scenes in Manama were reminiscent of a crackdown his regime had launched in mid-2009 against pro-democracy activists who disputed the results of a widely discredited election.

Pearl roundabout was first attacked by riot police in mid-February, forcing demonstrators to abandon the site for three days until troops surrendered it under the orders of Bahrain's crown prince.

That gesture was supposed to mark a watershed in the protests and the start of a national dialogue between the Shia majority, which accounts for 70% of Bahrain's population, and the Sunni minority which rules them.

But the dialogue faltered almost before it began, with protesters claiming they could not trust the government and unable to agree on their demands. For the past four weeks the roundabout in the central city had been transformed into a hub of activism with hundreds of tents, supplied food and a media centre. It had taken on almost a folk festival feel.

However, the status quo had seemed untenable amid increasing nervousness within the regime about the momentum of the demonstration.